The downside of being upbeat: The effects of consumer optimism on real economic activity

Using a quarterly consumer survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate that excessive optimism about future family finances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to age and income.